Ukraine central bank to probe ForEx for balanced hryvnia exchange rate

Макроэкономика 04.11.2014 The National Bank of Ukraine (NBU) will strive to determine a balanced level of the hryvnia exchange rate on the financial markets, NBU Head Valeriia Gontareva said on Nov. 3. Starting Nov. 5, the NBU will modify foreign currency auctions (under the Dutch scheme), moving from general coverage of the foreign currency deficit to smaller interventions, which will aim to identify the new balanced level of the hryvnia exchange rate. The auctions will be arranged daily and they will reveal the market level of the hryvnia exchange rate. Gontareva also did not rule out temporary weakening of the hryvnia rate in the coming days once the NBU eliminates some ForEx market limitations. She mentioned that she anticipates UAH 13/USD to be the balanced level of the exchange rate. In late September, the NBU forced commercial banks to keep the buying rate for dollars at UAH 12.95, which “stabilized” the official exchange rate at about UAH 13/USD, while creating a shadow market for dollars with a weaker actual hryvnia exchange rate. Alexander Paraschiy: Now that the elections are over, the NBU is using the opportunity to probe the real exchange rate of the hryvnia. Amid weak market confidence in the NBU and dominating uncertainty regarding the nation’s economic prospects, we can expect the hryvnia to start weakening further from Nov. 5, when the NBU launches such probes. At the same time, a lot will depend on how successful the NBU will be in tapering monetary aggregates. If the search for a balanced exchange rate will be followed by monetary tightening, we should not see the hryvnia sinking much (just to the black market rate of somewhere above UAH 13/USD) and very likely, the situation at the ForEx will stabilize soon. If hryvnia printing does not stop, such probing might trigger a new, strong devaluation wave. Unfortunately, in light of continued deposit outflow and near zero confidence in NBU policy, we can hardly anticipate the exchange rate will soon return to UAH 13/ USD, as Gontareva expects. An additional factor that adds uncertainty is the currently low level of NBU international reserves at USD 16.4 bln (3.1 months of future imports) as of end-September, which might have decreased to USD 13.5 bln as of end-October (due to a USD 1.67 Eurobond repayment by Naftogaz and USD 1.1 bln in NBU interventions). By end-December, reserves might decrease to below USD 9 bln (on the recently agreed upon USD 4.6 bln settlement with Gazprom), if no foreign currency loans will be secured and the NBU won’t buy dollars on the ForEx. At the same time, Ukraine’s improved current account balance points to no need for further hryvnia devaluation in the short- and mid-term.